American Economic Review 100 (June 2010): 641–672 http://www.aeaweb.org/articles.php?doi 10.1257/aer.100.3.641 = Beyond Markets and States: Polycentric Governance of Complex Economic Systems† By Elinor Ostrom* Contemporary research on the outcomes of diverse institutional arrangements for governing common-pool resources CPRs and public goods at multiple scales builds on classical economic ( ) theory while developing new theory to explain phenomena that do not fit in a dichotomous world of “the market” and “the state.” Scholars are slowly shifting from positing simple systems to using more complex frameworks, theories, and models to understand the diversity of puzzles and problems facing humans interacting in contemporary societies. The humans we study have complex motivational structures and establish diverse private-for-profit, governmental, and com- munity institutional arrangements that operate at multiple scales to generate productive and inno- vative as well as destructive and perverse outcomes Douglass C. North 1990, 2005 . ( ) In this article, I will describe the intellectual journey that I have taken the last half century from when I began graduate studies in the late 1950s. The early efforts to understand the poly- centric water industry in California were formative for me. In addition to working with Vincent Ostrom and Charles M. Tiebout as they formulated the concept of polycentric systems for gov- erning metropolitan areas, I studied the efforts of a large group of private and public water producers facing the problem of an overdrafted groundwater basin on the coast and watching saltwater intrusion threaten the possibility of long term use. Then, in the 1970s, I participated with colleagues in the study of polycentric police industries serving US metropolitan areas to find that the dominant theory underlying massive reform proposals was incorrect. Metropolitan areas served by a combination of large and small producers could achieve economies of scale in the production of some police services and avoid diseconomies of scale in the production of others. These early empirical studies led over time to the development of the Institutional Analysis and Development IAD framework. A common framework consistent with game theory enabled ( ) us to undertake a variety of empirical studies including a meta-analysis of a large number of existing case studies on common-pool resource systems around the world. Carefully designed experimental studies in the lab have enabled us to test precise combinations of structural vari- ables to find that isolated, anonymous individuals overharvest from common-pool resources. Simply allowing communication, or “cheap talk,” enables participants to reduce overharvest- ing and increase joint payoffs contrary to game theoretical predictions. Large studies of irriga- tion systems in Nepal and forests around the world challenge the presumption that governments always do a better job than users in organizing and protecting important resources. † This article is a revised version of the lecture Elinor Ostrom delivered in Stockholm, Sweden, on December 8, 2009, when she received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. This article is copy- right © The Nobel Foundation 2009 and is published here with the permission of the Nobel Foundation. * Ostrom: Workshop in Political Theory and Policy Analysis, Indiana University, Bloomington, IN 47408 e-mail: [email protected] and Center for the Study of Institutional Diversity, Arizona State University, Tempe, AZ.( I wish to thank Vincent Ostrom) and my many colleagues at the Workshop who have worked with me throughout the years to develop the research program that is briefly discussed herein. I appreciate the helpful suggestions given me by Arun Agrawal, Andreas Leibbrandt, Mike McGinnis, Jimmy Walker, Tom Wisdom, and by the Applied Theory Working Group and the Experimental Reading Group, and the excellent editing skills of Patty Lezotte. Essential support received over the years from the Ford Foundation, the MacArthur Foundation, and the National Science Foundation is gratefully acknowledged. 641 642 THE AMERICAn ECOnOMIC REVIEW JunE 2010 Currently, many scholars are undertaking new theoretical efforts. A core effort is devel- oping a more general theory of individual choice that recognizes the central role of trust in coping with social dilemmas. Over time, a clear set of findings from the microsituational level have emerged regarding structural factors affecting the likelihood of increased coopera- tion. Due to the complexity of broader field settings, one needs to develop more configural approaches to the study of factors that enhance or detract from the emergence and robustness of self-organized efforts within multilevel, polycentric systems. Further, the application of empirical studies to the policy world leads one to stress the importance of fitting institutional rules to a specific social-ecological setting. “One size fits all” policies are not effective. The frameworks and empirical work that many scholars have undertaken in recent decades pro- vide a better foundation for policy analysis. With this brief overview, let us now discuss the journey itself. I. The Earlier World View of Simple Systems In the mid-twentieth century, the dominant scholarly effort was to try to fit the world into simple models and to criticize institutional arrangements that did not fit. I will briefly review the basic assumptions that were made at that time but have been challenged by scholars around the world, including the work of Herbert A. Simon 1955 and V. Ostrom 2008 . ( ) ( ) A. Two Optimal Organizational Forms The market was seen as the optimal institution for the production and exchange of private goods. For nonprivate goods, on the other hand, one needed “the” government to impose rules and taxes to force self-interested individuals to contribute necessary resources and refrain from self-seeking activities. Without a hierarchical government to induce compliance, self-seeking citizens and officials would fail to generate efficient levels of public goods, such as peace and security, at multiple scales Thomas Hobbes [1651] 1960; Woodrow Wilson 1885 . A single gov- ( ) ernmental unit, for example, was strongly recommended to reduce the “chaotic” structure of metropolitan governance, increase efficiency, limit conflict among governmental units, and best serve a homogeneous view of the public William Anderson and Edward W. Weidner 1950; ( Luther Gulick 1957; H. Paul Friesema 1966 . This dichotomous view of the world explained pat- ) terns of interaction and outcomes related to markets for the production and exchange of strictly private goods Armen A. Alchian 1950 , but it has not adequately accounted for internal dynam- ( ) ics within private firms Oliver E. Williamson 1975, 1986 . Nor does it adequately deal with the ( ) wide diversity of institutional arrangements that humans craft to govern, provide, and manage public goods and common-pool resources. B. Two Types of Goods In his classic definitional essay, Paul Samuelson 1954 divided goods into two types. Pure ( ) private goods are both excludable individual A can be excluded from consuming private ( goods unless paid for and rivalrous whatever individual A consumes, no one else can con- ) ( sume . Public goods are both nonexcludable impossible to keep those who have not paid for ) ( a good from consuming it and nonrivalrous whatever individual A consumes does not limit ) ( the consumption by others . This basic division was consistent with the dichotomy of the ) institutional world into private property exchanges in a market setting and government-owned property organized by a public hierarchy. The people of the world were viewed primarily as consumers or voters. VOL. 100 nO. 3 Ostrom: Polycentric GovernAnce of Complex Economic systems 643 C. One Model of the Individual The assumption that all individuals are fully rational was generally accepted in mainstream economics and game theory. Fully rational individuals are presumed to know i all possible ( ) strategies available in a particular situation, ii which outcomes are linked to each strategy given ( ) the likely behavior of others in a situation, and iii a rank order for each of these outcomes in ( ) terms of the individual’s own preferences as measured by utility. The rational strategy for such an individual in every situation is to maximize expected utility. While utility was originally conceived of as a way of combining a diversity of external values on a single internal scale, in practice it has come to be equated with one externalized unit of measure—such as expected profits. This model of the individual has fruitfully generated useful and empirically validated predictions about the results of exchange transactions related to goods with specific attributes in a competitive market but not in a diversity of social dilemmas. I will return to a discussion of the theory of individual behavior in Section VIIA. II. Early Efforts to Develop a Fuller Understanding of Complex Human Systems The mid-twentieth-century worldviews of simple systems have slowly been transformed as a result of extensive empirical research and the development of a framework consistent with game theoretical models for the analysis of a broad array of questions. A. studying Polycentric Public Industries Undertaking empirical studies of how citizens, local public entrepreneurs, and public offi- cials engage in diverse ways of providing, producing, and managing